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A budget can be a great tool for managing your money. But typically a budget involves distinguishing between fixed vs. variable expenses. Fixed expenses are those that stay constant month after month, while variable expenses can change over time.
Understanding where your money is going toward these two types of expenses can be helpful as you work to track and optimize how you earn, spend, and save. What’s important to know is that each kind of expense can be lowered in many cases.
This guide takes a closer look at fixed vs. variable expenses, and offers tips on how to trim both types of expenses and free up funds for savings and future goals.
Key Points
• A budget helps manage money by distinguishing between fixed expenses (constant) and variable expenses (fluctuating).
• Fixed expenses typically take up a greater share of your monthly budget than variable expenses, since they include housing costs.
• Both fixed and variable expenses can be reduced, but cutting fixed expenses may require bigger life changes.
• Examples of fixed expenses are mortgage payments, car payments, student loan payments, and subscription fees.
• Examples of variable expenses are utilities, food, dining out, entertainment, and travel.
What Is a Fixed Expense?
The fixed expenses definition is: costs that remain the same over time, meaning you pay the same amount for them each month. Fixed expenses include items like a rent or mortgage payment, insurance premiums (which can be an often-forgotten budget expense), and gym membership. With fixed expenses, you know how much you will owe ahead of time. Fixed costs may change occasionally, like once a year if your rent goes up or your gym membership increases, for example.
Fixed expenses tend to make up a large percentage of a monthly budget since housing costs, typically the largest part of a household budget, are generally fixed expenses. This means that fixed expenses may present a good opportunity for saving money on a recurring basis if you can find ways to reduce their costs; you could then put the extra money in a high-yield savings account where it could grow over time.
However, cutting costs on fixed expenses may require bigger life changes, like moving to a different apartment — or even to a different city, where the cost of living is lower.
Keep in mind, though, that not all fixed expenses are necessities — or big budget line items. For example, a streaming service subscription that costs the same every month, is a fixed expense. It’s also a want vs. a need. Subscription services can seem affordable until they start accumulating and perhaps become unaffordable.
Examples of Fixed Expenses
Some of the fixed expenses you have might include:
• Mortgage payments or rent
• Car payments
• Student loan payments
• Membership and subscription fees
• Insurance premiums
• Childcare or tuition payments
• Internet or mobile phone fees
What Is a Variable Expense?
The variable expenses definition is: expenses whose amounts can change each month, depending on factors like personal choices and behaviors as well as external circumstances like the weather.
For example, in areas with cold winters, electricity or gas bills are likely to increase during the winter months because it takes more energy to keep a house comfortably warm. Grocery costs are also variable expenses since the amount you spend on groceries can vary considerably depending on what kind of items you purchase and how much you eat.
You’ll notice, though, that both of these examples of variable costs are still necessary expenses — basic utility costs and food. The amount of money you spend on nonessential line items, like restaurant meals or a night out with friends, are also variable expenses.
Whether it’s a discretionary expense or a need, variable simply means that it’s an expense that fluctuates on a month-to-month basis, as opposed to a fixed-cost bill you expect to see in the same amount each month.
Examples of Variable Expenses
These are some common variable expenses:
• Utilities
• Food
• Dining out
• Entertainment
• Personal care
• Travel and other flexible expenses
• Medical care
• Gas
• Property and car maintenance
• Gifts
Differences Between Fixed and Variable Expenses
To review the differences between variable vs. fixed expenses:
• Fixed expenses are those that cost the same amount each month, like rent or mortgage payments, insurance premiums, and subscription services.
• Variable expenses are those that fluctuate on a month-to-month basis, like groceries, utilities, restaurant meals, and movie tickets.
• Both fixed and variable expenses can be either wants or needs — you can have fixed expense wants, like a gym membership, and variable expense needs, like groceries.
How to Budget for Fixed and Variable Costs
When budgeting for fixed and variable expenses, it can be helpful to break them down into needs and wants.
• Start by budgeting for your needs, whether the items are fixed or variable expenses. This includes your rent or mortgage, car payment, and utilities. For needs that are variable expenses, like groceries or your electric bill, look over six months to a year’s worth of these expenses to get a sense of how much you’ll need to budget for them. Add up everything in the needs category.
• Next, review your discretionary expenses (or wants) like dinners out and entertainment over the last few months and add up what you spent. Go over the list carefully to see where you can cut back to save money.
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Ways to Save on Fixed Expenses
Just because an expense is fixed doesn’t mean it can’t be downsized. These strategies can help you trim back some recurring expenses.
Review Where Your Money Is Going
Take a look at your fixed expenses with a critical eye. Did your landlord raise your rent a significant sum? It might be time to look for more affordable options or get a roommate.
Has the number of subscription services you pay for crept up over time? You might save on streaming services by dropping a platform or two.
Refinance Your Loans
If interest rates are dropping, you might be able to save money by refinancing your loans, such as your mortgage. Check rates, and see if any offers are available that would reduce your monthly spend.
Consolidate Your Debt
If you have a significant amount of high-interest debt, such as credit card debt, you might consider paying it off with a personal loan that offers a lower interest rate. This may save you money in interest and help lower your fixed expenses. This is an option you could explore to see if it makes sense for you.
Bundle Your Insurance
Many insurance companies offer a lower premium if you sign up for both automotive and homeowners insurance with them. Check available offers to potentially reduce your costs.
Recommended: Savings Account Calculator
Ways to Save on Variable Expenses
Here are some possible ways to help minimize variable expenses.
Scrutinize How You Spend
When you track your spending, you may find ways to cut back. For instance, you could look for ways to do your grocery shopping on a budget by planning meals in advance and shopping with a list. You might be able to challenge yourself to go for one month without, say, takeout food and the next without movies, and then put the savings towards paying down debt.
Hit “Pause” on Impulse Purchases
If you feel the urge to buy something that isn’t in your spending plan, try the 30-day spending rule. Jot down the item, where you saw it, and the price in your calendar for 30 days in the future. When that date arrives, if you still feel you must have the item, you can find a way to buy it. But there is a very good chance the sense of urgency may have passed.
Try Different Budget Methods
If you find you need more help reining in your variable expenses, you might benefit from trying different budgeting tactics. “If it works with your income, the 50/30/20 budget is one simple method for people starting to organize their finances,” says Brian Walsh, CFP® and Head of Advice & Planning at SoFi. “This budget allocates 50% of your income for essentials, like rent and bills; 30% to personal day-to-day spending; and 20% for savings or financial goals.”
Other people prefer the envelope budget method or using a line-item budget to dig into where their money is going. You might also benefit from apps and digital tools to help you track where your money is going and even round up your spare change into savings. Many banks offer these tools to their customers.
Recommended: 50/30/20 Rule Calculator
Check in With Your Money Regularly
The exact cadence is up to you, but it can be helpful to check on your money on a regular basis. Some people like to review the balance in their checking account and savings account a few times a week; others prefer to review their accounts in-depth monthly. Find a system that works for you so you can see if your spending is on-target or going overboard.
Benefits of Saving Money on Fixed Expenses
If you’re trying to find ways to save some cash, finding places in your budget to make cuts is key. And while you can trim both fixed and variable expenses, lowering your fixed expenses can pack a hefty punch, since these tend to be costly line items. Also, the savings automatically replicate themselves each month when that bill comes due again.
But if you get a roommate or move to a less trendy neighborhood, you might slash your rent (a fixed expense) in half. Those are big savings, and you don’t have to think about them again once you’ve made the adjustment: They just rack up each month. The savings you reap can help you pay down debt or save more, which could help you build wealth over time.
Benefits of Reducing Variable Expenses
Of course, as valuable as it is to make cuts to fixed expenses, saving money on variable expenses is also useful — and depending on your habits, it could be fairly easy to make significant slashes.
By adjusting your grocery shopping behaviors and aiming at fresh, bulk ingredients over-packaged convenience foods, you might decrease your monthly food bill. You could even get really serious and spend a few hours each weekend scoping out the weekly flyer for sales.
If you have a spendy habit like eating out regularly or shopping for clothes frequently, it can also be possible to find places to make major cuts in your variable expenses. You can also find frugal alternatives for your favorite spendy activities, whether that means DIYing your biweekly manicure to learning to whip up that gourmet pizza at home.
Consider this: If you quit your morning latte habit and make coffee at home, you might save a grand total of $150 over the course of a month — not too shabby, considering it’s just coffee. Even small savings can add up over time when they’re consistent and effort-free — it’s like automatic savings.
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The Takeaway
Fixed expenses are those costs that are the same amount each month, like your mortgage, whereas variable expenses can vary, like your grocery bill. Both can be trimmed if you’re trying to save money in your budget, but cutting from fixed expenses can yield bigger savings, typically for less ongoing effort.
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FAQ
How do you identify a fixed expense?
A fixed expense is an expense in which the cost is the same every month like a mortgage payment, student loan payment, car payment, and subscription service payment.
Are groceries considered a fixed or variable expense?
Groceries are considered variable expenses because the amount and type of groceries you buy tends to change, along with how much you pay for them. Therefore, your grocery bill is not the same month to month.
Can a fixed expense ever become a variable expense?
Yes, a fixed expense can become a variable expense if the cost or usage terms of the expense changes. For example, if you switch to a cell phone plan that limits your data usage, you will likely pay extra if you go over the data limit. So your phone bill could change month to month and become a variable expense.
What is the 50/30/20 budgeting rule for expenses?
The 50/30/20 budgeting rule for expenses allocates 50% of your income for things you need, like rent and bills; 30% to wants, like eating out; and 20% for savings or financial goals such as building an emergency fund. This method is typically considered a simple and straightforward way to organize and manage a budget.
How often should you review your fixed and variable expenses?
Although the exact time frame is up to you, it can be helpful to review your fixed and variable expenses on a regular basis. Some people like to review their variable expenses weekly (since these expenses can change from week to week) and their fixed expenses monthly. Others like to review both types of expenses weekly. Still others prefer an in-depth monthly review of both fixed and variable expenses. Find a cadence that works for you so you can see if your spending is on track or if you need to cut back.
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